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First Republic Bank (NYSE:FRC)

Q3 2012 Results Earnings Call

October 17, 2012 2:00 PM ET

Executives

Dianne Snedaker - Executive Vice President and CMO

Jim Herbert - Chairman and CEO

Katherine August-deWilde - President and COO

Mike Selfridge - Senior Executive Vice President

Willis Newton - Chief Financial Officer

Analysts

Erika Penala - Bank of America Merrill Lynch

Aaron Deer - Sandler O’Neill & Partners

Ken Zerbe - Morgan Stanley

Steven Alexopoulos - JPMorgan

Joe Morford - RBC Capital Markets

Dave Rochester - Deutsche Bank

Casey Haire - Jefferies

Lana Chan - BMO Capital Markets

Paul Miller - FBR Capital Markets

Julianna Balicka - KBW

Timothy Coffey - FIG Partners

Herman Chan - Wells Fargo Securities

Brian Zabora - Stifel Nicolaus

Operator

Welcome to the First Republic Bank Third Quarter 2012 Earnings Conference Call. During today’s presentation the lines will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions)

Thank you. I would now like to turn the call over to Dianne Snedaker, Executive Vice President and Chief Marketing Officer. Please go ahead.

Dianne Snedaker

Thank you. And welcome to First Republic Bank’s third quarter 2012 conference call. Speaking today will be the Bank’s Chairman and Chief Executive Officer, Jim Herbert; President and Chief Operating Officer, Katherine August-deWilde; Senior Executive Vice President, Mike Selfridge; and Chief Financial Officer, Willis Newton.

Before I hand the call over to Jim, please note that any forward-looking statements made during this call are made as of today, are based on management’s current expectations, and are subject to risks, uncertainties, and assumptions.

Potential risks and uncertainties that can cause the Bank’s business and financial results to differ materially from these forward-looking statements are described in the Bank’s periodic reports filed with the FDIC, including the Bank’s current report on Form 8-K filed today.

In addition, some of the financial information discussed on this call includes non-GAAP financial measures. The Bank’s earnings release, which was issued this morning and is available on the Bank’s website, presents reconciliations to the appropriate GAAP measures and explains why the Bank believes such measures are useful to investors.

And now, I’d like to turn the call over to Jim Herbert.

Jim Herbert

Thank you, Dianne. And thanks to everyone for joining us today. We are very pleased with our third quarter results, as well as our results year-to-date. Let me run through a few key numbers.

Core EPS was up 29% for the quarter year-over-year and up 24% for the first nine months year-over-year. Our book value per share increased 4% for the quarter and 15% from a year ago.

Tier 1 leverage ratio continues to be very strong at 9.33% up from a year ago. Importantly, credit quality also remains excellent. Nonperforming assets remained at a very low 13 basis points.

I’d like to comment for a moment on the growth in lending, which continues to be quite strong. All of our lending is direct retail origination and as historically of three primary types.

The jumbo single family home loan business, which has always been a core client acquisition product for us, is currently priced very competitively as everyone knows. As a self-evident from our volume this quarter and this year so far, we’re holding our own just fine. Our strong client service culture and our brand are prevailing.

Since 1985 First Republic has been active in the secondary market for loans sales through mortgage banking activities. Conditions are particularly favorable in the secondary market right now, particularly for highest quality of loans as this quarter represents in our numbers.

We’re taking full advantage of the opportunity by applying this extensive experience. The increase in our loan volume that we’ve seen is primarily reflective of the Federal Reserve’s policies on low rates.

Importantly though, also, our five core coastal urban markets are generally experiencing an accelerated economic recovery relative to many other areas of the country. The result of both of these trends is that we’ve had meaningful demand for home loans both refinanced and increasingly purchases.

In terms of credit quality, it’s very important to note that we continue to apply exactly the same careful approach to lending which we have done for 27 years, not a thing has changed in our standards.

In our judgment, with the strengthening economic conditions in our markets, very low interest rates, excuse me, historically high housing affordability and recently improving home prices. The loans that we are now originating are as safe as any that we have originated in our entire 27-year history.

The next largest segment of our loan portfolio is secured by income properties both commercial and multifamily located within our markets. We have likewise originated these types of loans quite successfully since 1985.

These loan characteristics have never been stronger as measured by loan-to-value ratio and debt service coverage ratio. The average loan size of these multifamily commercial loans is fairly modest about $2 million.

Most of the remaining loan growth has been in business loans, in a few very carefully chosen segments. Two market areas represent more than half of our business lending. The first is what we refer to as capital call lines of credit to venture capital, private equity and real estate funds, of which we now bank several hundred.

The other is loans to non-profits, particularly independent schools. We’ve been in each of these areas for between 10 and 20 years with virtually no losses. Mike Selfridge will talk more about this in a moment.

Overall, we’re very pleased with the quarter. New client acquisition continued to be extremely strong, loan origination and loan sales are very strong, asset quality remains excellent and wealth management continues to expand very nicely. We’re also additionally pleased to have declared another quarterly cash dividend of $0.10 per share.

Now, let me turn the call over to Katherine.

Katherine August-deWilde

Thank you, Jim. Third quarter results continue to reflect the strength of our business model. During the quarter, loans outstanding increased 5%, deposits rose 6% and wealth management assets climbed 7%.

In each of the past two quarters, we originated $4 billion of loans. Importantly, we have not relaxed our credit standards in any way. We continue to lend very conservatively, each loan is retail originated, fully documented and fully underwritten.

Home loans were two-thirds of total loan originations for the quarter. Of these almost 40% were for home purchases. Our weighted average loan-to-value on home loans originated continued at 60%.

The current low interest rate environment presents a challenge to our net interest margin. However, these low interest rates also create an opportunity to attract many new clients and on the plus side of lower rates, we have been able to realize substantial mortgage banking gains on the sale of loan.

For those of you who maybe newer to First Republic, we have been very active in loan sales and servicing as a mortgage banker since we were founded. Because of the high quality of First Republic’s mortgages, we’ve historically had robust demand from investors in the secondary market. This was true in the third quarter. We sell the larger amount of loans at higher prices than we have in the past.

During the quarter, investors bought $774 million of loans and we realized a gain of $12.5 million. As has been our experience over many years, mortgage banking sales were contra cyclical. When rates decline and margins are under pressure, we can usually originate and then sell more loans through our mortgage banking activity.

In a way, this is our best model, since we average seven to nine other products with our clients moving the mortgage off the balance sheet preserves capital, while keeping all the related deposits and wealth management assets.

Deposit growth continues to be quite robust. Total deposits rose to $25.7 billion, up 6% for the quarter. The continuing improved mix and asset management of deposit rates reduced our average deposit costs to 29 basis points for the quarter. The growth initiatives in wealth management continue to show very positive results.

Assets under management rose to $24.8 billion, increasing $1.5 billion for the quarter, up 7%. Assets were up $4.4 billion or 22% for the year and net new client flows for the quarter were over $800 million.

During the first two years of are independence, we carefully invested in the franchise to promote earnings growth and maintain our excellent level of client service.

As we said last quarter, we’re now pausing a bit on new hires and focusing on the integration of new people to maximize their productivity. As a result, hiring is down from prior quarters. Most of the people we added in the third quarter were to support the operational side of our business.

In part because of the slowdown in hiring and other initiatives, our core efficiency ratio declined to 58.6% for the quarter, down from 60.5% in the second quarter. In short, we have very good momentum across all of our businesses.

And now, I’d like to turn the call over to Mike Selfridge.

Mike Selfridge

Thank you, Katherine. Let me briefly discuss the conditions in our markets and also our business banking. Economic conditions in all of our geographies remained quite solid. Home sale activity is strong and inventory is constrained. Apartment and commercial rents are rising and vacancies are falling.

The San Francisco Bay Area which as you know represents just over half of our loan book continues to perform particularly well and the real estate fundamentals in this market remain very strong. Business banking also continues to perform well.

This has been an important contributor to our franchise both in terms of loans and deposits. Business deposits were up 11% in the quarter and now account for 46% of total deposits. I’d like to underscore that our approach to business banking much like our home lending is very focused, straightforward and driven by relationships, just like everything we do.

One key measure of the quality of our business banking clients is that they are very highly liquid. They bring to First Republic Bank on average $5 in deposits for every $1 in loan balances.

I also want to note that we typically bank clients in industries that we have known for many years. We’ve been banking non-profit organization for more than 20 years with only one small loan loss. We’ve been making capital call loans to venture capital, private equity and real estate firms since 1999 without a single loan loss.

Today, these two categories represent 58% of our business loan commitments. We remain very deliberate in our business lending, which is based on a deep understanding of a few carefully chosen market segments.

And now, I’d like to turn the call over to Willis Newton.

Willis Newton

Thanks, Mike. I would like to highlight some of the key elements of this very good quarter and indeed very good nine months. Our core net interest income for the third quarter was up $14 million or 6% over the prior quarter. This increase was primarily due to higher average assets earning a comparable margin.

We are pleased to report that our contractual net interest margin was 3.47% only 1 basis point lower than the prior quarter. While our loan yields continued to decline somewhat due to disciplined pricing on the deposit side we were able to reduce our contractual deposit costs by 9 basis points in the third quarter to a very low 29 basis points.

Our NIM also benefited from $200 million decline in average cash balances for the third quarter versus the prior quarter.

As Katherine noted, we had an outstanding quarter for mortgage banking both in volume and in price. We sold $774 million single family home loans. This volume was 50% above the quarterly average of loans sold in the first half of this year.

Our gain on loans sold was 162 basis points, compared to approximately 110 basis points in the prior quarter. Higher loan volume sold at better prices resulted in a higher gain on sale of loans of $12.5 million.

I would point out that during the prior eight quarters we recorded total sales of $2.3 billion and net gains of $20 million, which on average was 85 basis points.

During the quarter, loans in our servicing portfolio repaid at a historically high rate nearly 30%. As a result of the downward trend in mortgage interest rates, we recorded a $3.4 million impairment charge to reduce the carrying value of our mortgage servicing rights.

Such charge is above our level that we’ve taken in prior quarters, after this charge at September 30th, our total MSRs we’re carried at $16 million or 38 basis points on the total loan service.

While we enjoyed very good mortgage banking results, we are pleased to also generate positive operating leverage. If we exclude the mortgage banking gains net of MSR write-offs, our net interest income plus the revenues were up $15 million compared to the prior quarter. This is 22% annualized.

Our non-interest expense was up $6.6 million or 16% annualized, thus creating operating leverage above or $8 million.

I would note another pro forma calculation. If our mortgage banking results have been the same as last quarter, our core efficiency ratio would have been 59.7%. This is still somewhat of a decrease from last quarter.

We continue to be strongly capitalized. Our Tier 1 leverage ratio was 9.33%. Importantly, our core EPS for the third quarter is 29% above the same quarter last year and our core EPS for the first nine months is 24% higher than last year.

In summary, our well-capitalized clean balance sheet continues to deliver high quality stable earnings.

Now, I’d like to turn the call back over to Jim.

Jim Herbert

In summary we’re very pleased with the quarter, as well as our nine month year-to-date. First Republic continues to effectively execute its long-term business plan, which is focused on asset quality, extraordinary service and the building of relationships.

We’re especially pleased with the 15% after-tax increase in book value per share over the last 12 months. The continued strong demand for our very high quality home loans in the secondary market is very positive and gives us considerable control over our balance sheet.

Finally, this quarter’s results also reflect our successful efforts to continue to lower to cost over the deposits and manage our expenses. We’re pleased with both our net interest margin and efficiency ratio changes, and the strong earnings growth.

Now I’d like to turn the call back to the operator and take any questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Erika Penala with Bank of America Merrill Lynch. Your line is now open.

Erika Penala - Bank of America Merrill Lynch

Good morning.

Jim Herbert

Good morning Erika.

Erika Penala - Bank of America Merrill Lynch

Rather good afternoon. My first question is on the efficiency ratio. I appreciate the comments that Willis made that if you exclude the mortgage banking activity this quarter that the efficiency ratio be closer to 60%? But you also mentioned that you are pausing your new hiring?

I guess, as we look at the efficiency ratio for 2013 and assuming, I mean, it feels like this refi tailwind will continue at least through the first half of next year. Should we look more for a 58% efficiency ratio or is 60% a better assumption on a go-forward basis?

Willis Newton

Hi, Erika. We are continuing to invest in our franchise in many areas. So our expenses will continue to grow. The range for our efficiency ratio, we think will still be in the 58% to 60% level, on pretty much a normalized basis and we will expect to continue to sell loans and to have mortgage banking results.

Erika Penala - Bank of America Merrill Lynch

And in terms of how we’re thinking about the split between what you retain and what you end up selling. So if we’re make, let’s say, we assume something like 20% to 25% loan growth next year. Is there sort of a certain level of growth or you say, we should originate some of our production because there is so much more demand for it or is it really -- it really fluctuates from quarter-to-quarter?

Jim Herbert

It’s Jim, Erika. It will fluctuate from quarter-to-quarter. The -- as Katherine said in her comments, the mix of what we sell is driven to some extent by selling the longer term fixed.

The market currently wants that obviously. So we are generating quite a lot of that. But it’s a little bit reactionary to what the mix is and also to our balance sheet considerations in terms of growth.

Erika Penala - Bank of America Merrill Lynch

Okay. Thanks for taking my questions.

Jim Herbert

Yeah.

Operator

Your next question comes from the line of Aaron Deer from Sandler O’Neill & Partners. Your line is now open.

Aaron Deer - Sandler O’Neill & Partners

Hi. Good morning, everyone.

Jim Herbert

Good morning.

Aaron Deer - Sandler O’Neill & Partners

If I may, just a follow-up on Erika’s question, trying to get the expense line and how that might be correlated with the gains in the quarter was? Is this -- is the compensation what we saw this quarter, is that something to build off of that, was there any sort of accelerated comp expense that would have been tied to the mortgage sales in the quarter?

Mike Selfridge

Aaron, the compensation is driven from the mortgage origination side, as well as the growth in deposits and assets under management. It does not relate to the sale of loans. You will see that solely in the gain on sale line.

Jim Herbert

We are - it’s Jim. We are, as Katherine said, slowing down the hiring of new relationship managers and integrating in those we have hired. We have hired quite a number as you probably know and to say and we want to take the time to integrate them in properly.

They traditionally turned to profit between one and two years with us and so we’re going through that process right now. And our focus is also on the support functions in the enterprise of back office and making sure that they are in line with the volume and productivity of all the new hires on the relationship manager side.

Aaron Deer - Sandler O’Neill & Partners

Okay. That’s helpful. And then, Willis, on the margin, obviously the core margin held up very well this quarter. I’m just wondering with declining level of excess liquidity that you put into work and given the yield pressures, what kind of margin pressure might would be looking for on a core basis going forward?

Willis Newton

Well, I think the trends with the announcement of an expectations that rates will stay low for quite a while. I think we will continue to see pressure on our loan yields and there is really a not a lot more we can do on the deposit side.

We benefited from an improvement in the mix, as well as some pretty tight pricing but that’s almost all we can do on that side. The deposit growth continues to be good. So putting our liquidity to work when we sell loans is still a challenge.

Aaron Deer - Sandler O’Neill & Partners

Okay. Great. Thanks.

Willis Newton

Our focus is to continue to grow our net interest income line through the increase in the average balance of interest earnings assets earning a strong, perhaps slightly lower margin.

Aaron Deer - Sandler O’Neill & Partners

All right. Okay. Thank you.

Operator

Your next question comes from the line of Ken Zerbe with Morgan Stanley. Your line is open.

Ken Zerbe - Morgan Stanley

Good. Thanks. Hey, guys.

Jim Herbert

Hi, Ken.

Ken Zerbe - Morgan Stanley

And just a question on expenses. How much of the growth is discretionary? I would like to think that you’re just taking the profits of the higher revenues, reinvesting in the business to grow more revenues in the future. But I don’t know to what extent it’s that mentality versus simply you originated more, so you have to pay more and so your efficiency ratio is essentially set irrespective of what you choose to do? Does that make sense?

Mike Selfridge

No. The question doesn’t make sense. Your answer is not quite as clear as you’d like it. But as you know we have a strong bonus compensation program in the Bank. Importantly, it’s not just driven by loan volume. In fact our typical relationship manager would get a little less than half their take home from loan volume. The larger share actually comes from assets under management or deposits and other products.

So it is driven by volume to some extent. But to the extent that the productivity of our volume is driven by limited number of people or a set number of people, the adding of support people for the larger balance sheet is in fact incrementally less expensive and has some operating leverage in it.

We -- the high touch model though and the value of the last part of your question sort of implying this. The high touch model that we run is a -- has historically been relatively expensive model albeit very successful and predictable.

And as a result, we have always thought of our efficiency ratio operating between 58% and 62% and that’s been true for quite a long time. And it’s been true somewhat irrespective of marginal margins fluctuating between 3% and 3.40% over the years.

Ken Zerbe - Morgan Stanley

Okay. I think that helps. The other question I had I think a quarter or two ago you mentioned that the average yield on new lending was, I’m going to say, maybe 3.25%. Do you have a similar number to what you’re putting on today, in third quarter?

Katherine August-deWilde

Yeah. In the third quarter, the average yield was 3.19% versus last quarter 3.20%.

Ken Zerbe - Morgan Stanley

Okay. So really unchanged. Okay. Great. Thank you very much.

Operator

Your next question comes from the line of Steven Alexopoulos with JPMorgan. Your line is now open.

Steven Alexopoulos - JPMorgan

Hi, everyone.

Jim Herbert

Hi, Steve.

Steven Alexopoulos - JPMorgan

Not to beat a dead horse on expenses, I guess everyone of us has now asked a question on this. Jim, I know, since you came out of BofA, there was a backlog of expenses to be incurred, just running through all the line items, all running now sort of mid 20% above a year ago.

How closer we to finally realizing the incremental expense build that was required, new markets such as New York building out wealth management, as we are all struggling to say is 20% a run rate given the performance of the company, or is there an incremental build still in the numbers today?

Jim Herbert

Well, that’s a good question. And the answer is there is still an incremental build in the numbers today in a couple of areas. We have about 10 more offices that are in the works and opening over the next 12 to 15 months. All of those basically have been in the works for a while.

There aren’t any new names on the list and I think the latter comment is relatively important. There aren’t any new names on the list and other than Palm Beach, which we’ve been working on for a while and have been approved for. We have not added any new for a couple quarters now. We are doing some more office space because of the back office support needs but not very much, it’s building out.

So, the physical build out of the enterprise is probably past halfway done in terms of the expansion maybe even more. In terms of relationship managers, as you know that’s entirely discretionary.

So, we tend to -- we went, we took advantage of the opportunity when we first came out of the dislocation that was in the marketplace. That dislocation has settled down a little bit and we have hired some very, very good people and so we’ve shifted our focus to improving their results and their efficiency.

And so I think that piece of the build out will probably never, never is a bad word but we don’t foresee it attaining the same rate that we’ve been going through recently on the last two or four quarters until this last quarter. So that’s slowing down.

On the wealth management side, we continue to look at and hire producers. But of course that doesn’t take capital. It does impact the efficiency ratio, but it’s not a capital leader.

Steven Alexopoulos - JPMorgan

Okay. That’s helpful. Maybe just shift gears, as a follow-up on the loan yield pressure. I guess core loan yields are running down around 15 basis points almost per quarter over the last few quarters. From a high level, should we expect this level of pressure or does QE3 accelerate that a bit just given what’s happening with refis?

Jim Herbert

We’re not really sure is the honest answer. It remains to be seen what QE3 will do. I think one month doesn’t get tail to tail. It’s clearly accelerated a little bit pressure on the fixed rate and because they are buying mostly agency, fixed agency it appears. People don’t really know but that’s what looks like to us. And so that probably put some more pressure but that’s mostly mortgage banking activity for us anyway and you get out to past and fixed. And so, whether it’s going to put more pressure on the part of the portfolio we keep on our balance sheet, it remains to be seen. So far not a lot of additional pressure, a little bit but not too much.

Steven Alexopoulos - JPMorgan

Got it. Jim, maybe for the last question, you’ve been through many mortgage cycles or you’ve been in the business for a long time, just what’s your best guess, how long this refi wave goes on with QE home prices going up. Do you think this could potential go straight through 2013?

Jim Herbert

Strictly a personal guess, yeah.

Steven Alexopoulos - JPMorgan

Thanks. Appreciate the color.

Jim Herbert

Okay.

Operator

Your next question comes from the line of Joe Morford with RBC Capital Markets. Your line is now open.

Joe Morford - RBC Capital Markets

Thanks. Good morning, everyone.

Jim Herbert

Good morning, Joe.

Joe Morford - RBC Capital Markets

I was just curious first to follow-up on a deposit growth. It’s pretty broad-based this quarter, just Mike touched on a little bit with the business bank move. Wondered if you could just talk a little bit more to the drivers to that this quarter and any color on -- is a lot of but just coming from additional cross-sell or you’re gathering about the new relationships as well?

Katherine August-deWilde

It’s coming from several areas. We are continuing to add new relationships. The new relationships in business bankers we hired bring us more deposits. And we had a very good momentum in our business banking area, which each time we ran the business client the deposit growth accelerates. So it’s across the board.

Joe Morford - RBC Capital Markets

Okay. And then a follow-up to some margin related issue. The security field held in very well this quarter around 5.5%. I was just curious what purchases you made in the quarter. What types of investments and what kind of yields you were getting?

Jim Herbert

The incremental purchases in the quarter are actually fairly modest. But we continue to buy some additional municipals and we bought a few CMOs -- commercial CMOs with very modest amount actually. And the yields are holding fairly well, that’s primarily a fixed rate portfolio as you probably know. So, it’s natural that it would hold up. And it’s benefiting us quite considerably right now.

Joe Morford - RBC Capital Markets

Right. Okay. Thanks so much.

Operator

Your next question comes from the line of Dave Rochester with Deutsche Bank. Your line is open.

Dave Rochester - Deutsche Bank

Hey, good morning, guys.

Jim Herbert

Hi, Dave.

Dave Rochester - Deutsche Bank

If you could just update us on the competitive landscape, just generally what you’re seeing out of the larger competitors. And then perhaps, if you could kind of drill down into the various loan products as to where your pricing ready ARMs for example, where the buy down rates are today on average and then maybe also on the C&I and CRE?

Katherine August-deWilde

In the market for home loans, it’s quite competitive. It’s also competitive for income property loans. And we’re working hard to strike a careful balance between pricing and acquiring clients. As I think you know, we based our price on relationships, we focus on cross-sell.

Dave Rochester - Deutsche Bank

Yeah.

Katherine August-deWilde

And all of the large banks are active in the single family as well as the income property lending. Our business banking tends to be adjustable with the exception of our non-profit lending.

Dave Rochester - Deutsche Bank

In terms of rates where are you seeing buy down rates today on the resi side and then maybe just all that on the resi?

Katherine August-deWilde

It’s really hard to say pricing depends completely on a matrix, we value price. So, that it depends on how much we do with each client, so it’s hard to say.

Dave Rochester - Deutsche Bank

Okay. And then just switching to the deposit side, I know you mentioned there isn’t much room there. But I was just wondering what the timing of the adjustments you made was in 3Q and if you could expect to see any partial quarter impact from that flowing through into 4Q that might help offset some yield pressure?

Willis Newton

Yeah. Hi, Dave. It’s Willis. We made most of these actions around the middle of the quarter. So, there is a potential for a little impact, a positive impact on the pricing. But equally importantly is the high balance of -- higher balance of checking, which is our lowest cost deposit product.

Dave Rochester - Deutsche Bank

Great. Thanks. And just one last one, it seems like you could probably move the cash balances down more. Where would you see a good floor on those as you deploy the excess cash was around $400 million, $500 million that level?

Willis Newton

Yeah. That’s about right, Dave. $400 million to $500 million is what we would need to operate the Bank on average. Of course, when you sell loans, you generate extra cash and when you have deposit growth you have extra cash.

Dave Rochester - Deutsche Bank

Okay. Great. Thanks, guys.

Operator

Your next question comes from the line of Casey Haire with Jefferies. Your line is now open.

Casey Haire - Jefferies

Hi, good morning, guys. A question on ALCO strategy, I know last quarter you guys mentioned that, you see a need in a lower for a longer environment to drawdown FHLBs, just wondering what’s your thoughts are here. I know we’re obviously a little bit lower for longer, just wondering if that’s still the go-forward policy to avoid the FHLB draws?

Jim Herbert

At this point, it is Casey, because in addition to that discussion that you referenced. We’re clearly selling a lot of fixed rate assets. And so, we’re adjusting on the asset side a little more aggressively than we were and previously we were adjusting on the liability side. As the origination mix shift towards fixed, we have a little less pressure to match fixed capital on our balance sheet with fixed rate draws. Having said that, would we keep a very close eye on it, we are still slightly positive asset sensitive?

Willis Newton

Casey, I’d also add that we did a preferred stock offering in June and that added $150 million of very long-term liabilities as we think about them in our structure. So that helped us to continue to be very closely matched.

Casey Haire - Jefferies

Got you. And then just switching to capital, obviously you’re still strong at 9.3% Tier 1 leverage but it did come down 20 basis points. Just wondering, if this growth keeps up, how does that change your growth strategy and/or capital return?

Jim Herbert

Well, we watch our capital very carefully as you know and we always anticipate needs in advance if we possibly can. We are very comfortable at 9.33%. It’s a good capital ratio for us. Our target overall is 8% or better and we don’t intend to get right up to it.

But we’re pretty pleased with the ability to sell the loans on the mortgage banking side. We are going to watch for another quarter and see how that plays out. That actually is a very useful safety valve so to speak for growth in the face of strong volume, which is in fact right where we find ourselves.

Jim Herbert

Casey, I’d also add that we are continuing to accrete loan discounts. We’ve just passed the halfway mark. But we still have about $370 million of discounts to come into our earnings over the next several years and this will continue to add to our capital base.

Casey Haire - Jefferies

Got you. Last one for me, just tax rate at 30.5% is that the go-forward rate?

Jim Herbert

We believe that -- that’s a good rate as we go forward. We know we -- this is based on a GAAP concept and we will take a careful look at the end of the year and that will give us our best guess as we go forward to next year.

Casey Haire - Jefferies

Okay. Thanks.

Operator

Your next question comes from the line of Lana Chan with BMO Capital Markets. Your line is open.

Lana Chan - BMO Capital Markets

Hi. Just one question for me. In terms of the loan pipeline as of today, how would you characterize it versus the beginning of the previous quarter?

Katherine August-deWilde

You said the loan pipeline.

Lana Chan - BMO Capital Markets

Pipeline.

Katherine August-deWilde

I’m sorry. The pipeline remains strong and we’re pleased.

Lana Chan - BMO Capital Markets

Okay. And then I just also on the expenses, again in terms of the planned branch openings to tend that are in the works is that -- how much of the expense is related to those are sort of already embedded in the current run rate?

Jim Herbert

I’d say about 40% of the expense is primarily the lease cost for all of these locations has been included. We have not completed the build out, so we won’t have the depreciation cost until we open it. And then several months before we open a branch, we will begin to hire personnel. So that they’ll be fully trained by the time those branches are opened.

Lana Chan - BMO Capital Markets

Okay. Thank you.

Operator

Your next question comes from the line of Paul Miller with FBR Capital Markets. Your line is open.

Paul Miller - FBR Capital Markets

Yeah. Thank you very much. Hey guys, we all know that in the conforming market we’re seeing some of the highest gains on sale that we’ve ever seen and we’re also seeing a very strong looks like a gain on sale number for you guys in that $12 million range. Is there anything that’s one-time benefit in that or is that just you selling your 30 year fixed into the secondary markets and are you seeing -- you’re experiencing same type of gain on sale margins as the conforming markets?

Katherine August-deWilde

There is nothing unusual about that. We sell 30-year, 15 and 10-year fixed rate loans and we were rewarded with good pricing.

Mike Selfridge

We keep servicing.

Katherine August-deWilde

Always keep servicing.

Paul Miller - FBR Capital Markets

Given that we are in the midst of this very strong refi boom, should we be modeling something into those numbers going forward for the next couple of quarters or as long as we think this refi boom is going to exist?

Katherine August-deWilde

We sell loans every quarter. We have from our beginnings but we don’t predict in advance how much we’re going to sell. It depends on management of our balance sheet and the amount of fixed rate loans we originate, but we would expect to see good pricing for a while.

Paul Miller - FBR Capital Markets

Okay. Thanks a lot guys.

Operator

Your next question comes from the line of Julianna Balicka with KBW. Your line is open.

Julianna Balicka - KBW

Good morning.

Jim Herbert

Good morning.

Julianna Balicka - KBW

I wanted to follow-up on the integration of the new hires you’ve made as you’re consolidating down the new hires and integrating the people you’ve recently hired. In terms of their productivity, what kind of increase in productivity originations, deposit growth can we start to see from them kind of getting their run rate going?

Jim Herbert

Well as a practical matter, there is two sides, there is kind of two components. Even in spite of all the new hires we have, we have incredibly productive long-time bankers here. So, the incremental add from the new hires is moderate.

The real issue is when do they cover their expense carry and they cover their expense carry generally at the end of about their 12th or 14th month, somewhere right around there. And then they tip over into profitability for us and of course they are delighted as well, because their book of business is building and has come over with them.

And so, to the extent that most of our hires really occurred in the 12 months ending this past June or so, then we are now in that full-year period for most of them. And so I hate to be that soft on the answer but it’s complicated -- but it’s really, actually also very simple. 12 months after we hire somebody if they are not here or they are breaking even.

Julianna Balicka - KBW

Okay. That makes sense. And then in terms of your origination volumes, I mean what’s the real limiting factor on your growing origination much more aggressively and selling more loans more aggressively?

Jim Herbert

Quality. Quality of service delivery, quality of assets, just how many can you do well. We are dogmatically driven by doing it well. We’re not quantity driven, we’re quality driven.

Julianna Balicka - KBW

Okay. Thank you.

Operator

Your next question comes from the line of Timothy Coffey with FIG Partners. Your line is open.

Timothy Coffey - FIG Partners

Good morning everybody.

Jim Herbert

Good morning.

Timothy Coffey - FIG Partners

I had a question about the deposit growth in the quarter. It seems like there was acceleration this quarter than in the previous quarters, is this one-time thing or do you see this as an ongoing trend?

Katherine August-deWilde

We continue to grow deposits nicely from our existing clients as well as from the new clients and one of the benefits you see of our continued good business and the new producers we hire leads to more deposit growth. Our offices are also quite productive and get increasingly productive over time.

Jim Herbert

We were also just alert. We and others face this and that is the unlimited insurance ends at the end of this year at least as of now on business checking accounts and on checking accounts. And we don’t have -- we don’t know how that will play out nor does anyone else because it hasn’t occurred before.

So, I would just note a word of caution for your thinking not only on us, but everybody. On the other hand, the deposit success across the franchise has been in fact quite considerable.

Timothy Coffey - FIG Partners

Okay. Great. And then my other two questions were on the mortgage business. As a percentage terms of what you’re originating right now, how much of that is projects versus financing?

Katherine August-deWilde

About 40% is purchases.

Timothy Coffey - FIG Partners

Okay. Has that changed through the last four quarters?

Katherine August-deWilde

Yeah. It has. It’s up a bit from the low 30s over the last year and this quarter looks like it will continue to be 40% or more.

Timothy Coffey - FIG Partners

Okay. Then on the net margin, net loans sale margin, is that number positively correlated to the volume that you saw?

Katherine August-deWilde

No. Each sale is based on bidding unless they are flow basis and it’s based on what the market thinks of our quality of our mortgage loans as well as the pricing at the time and the product we are offering and the yields on loans. We have lots of bidders, when you put out a package we have many people competing for the loans.

Timothy Coffey - FIG Partners

Okay. Great. Thanks for answering my questions.

Operator

Your next question comes from the line of Herman Chan with Wells Fargo Securities. Your line is open.

Herman Chan - Wells Fargo Securities

Thanks for taking my question. Revisiting the question on competition, are you seeing any sense of differentiation in competition within your main markets? And I’m also curious on the dispersion of jumbo production within your markets? Thanks.

Katherine August-deWilde

We are seeing some of the largest banks be competitive in all of our markets on both coasts. And we are not seeing too much difference, the largest banks are the most competitive. We are doing about the same amount of jumbo production across the country. Most of our business would fit into the jumbo category.

Herman Chan - Wells Fargo Securities

Great. Thanks. I have a question on wealth management as well, which have seen some pretty steady growth in recent quarters. How much of the AUM growth has been driven by the effect of new hires bringing onboard previous relationships and how much is more of a function of traditional cross-selling?

Katherine August-deWilde

It’s more than 50% new hires but we’re doing a very good job with our existing long-term relationship with wealth managers bringing in continued business as their clients refer for their friends. And we’re doing a good job cross-selling our bankers’ clients into wealth management. So, I’d say, it’s a little more than 50% new, but not more than that.

Herman Chan - Wells Fargo Securities

Thanks for taking my questions.

Operator

Your final question comes from the line of Brian Zabora with Stifel Nicolaus. Your line is open.

Brian Zabora - Stifel Nicolaus

Thanks. Sorry if I missed this but did you provide how much of your mortgage production was fixed versus floating in the third quarter?

Katherine August-deWilde

We did not.

Brian Zabora - Stifel Nicolaus

Do you have any sense of what that was third quarter versus maybe second?

Katherine August-deWilde

It’s probably not very different and most of the 30 and 15-year fixed are sold.

Brian Zabora - Stifel Nicolaus

Okay. And then just, we did see -- one more question on home equity. It was down in the quarter, are you seeing people rolling balances into first now, or is this a trend that we may see going forward?

Katherine August-deWilde

Whenever mortgage rates decline, people often take advantage of that to put on a new mortgage at a lower rate and then their home equity line may pay down a bit.

Brian Zabora - Stifel Nicolaus

Thanks for taking my question.

Operator

I will now turn the call over to Jim Herbert for closing comments.

Jim Herbert

Okay. Great. Thank you very much. We’ll thank you for your questions and we appreciate your focusing on us, I know it’s a busy time. Bottom line is a good quarter. Credit holds up well. Earnings were good. Book value continues to grow. Our volume was strong. So we’re quite pleased. We thank you very much for your time.

Operator

This concludes today’s conference call. You may now disconnect.

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